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Hinkley Deal Could Be Make or Break For EDF, Analysts Say

Hinkley Point C will be a burden on EDF's balance sheet, according to analysts.
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The British government’s decision to proceed with the Hinkley Point C nuclear power plant could either bolster or wreck Électricité de France SA, or EDF, the French energy giant, according to financial analysts.

“If this project is delivered on time and on budget, it could provide a lot of returns to shareholders,” said Ahmed Farman, an analyst at Jefferies in London. “If not, it could destroy value and put pressure on an already indebted company.”

According to the agreement with the British government, EDF gains a stake of 66.5% in the £18 billion ($23.8 billion) plant. State-owned China Nuclear Group Corp. will take a 33.5% stake.

The closing marks the culmination of long-lasting negotiations among the three governments and the boards of EDF and China Nuclear. Doubts about the viability of the project led to the resignation of Thomas Piquemal, EDF’s chief financial officer, earlier this year.

EDF, 84.9% owned by the French government, did not respond to an emailed request for comment.

EDF’s net debt currently stands at €37 billion. However, its market capitalization is only €23 billion, a result of falling energy prices and the downdraft in stocks earlier this year.

EDF’s share of the total cost is €14.4 billion, of which €2.9 billion has already been spent, leaving EDF’s portion of the remaining outlay at about €11.5 billion, said Chris Moore, a utilities analyst at Fitch Ratings.

EDF has announced measures to raise cash, including planned asset sales of €10 billion by 2020, in addition to cost cutting of €1 billion by 2019. An additional €4 billion will come from an equity issuance.

“To put this into context, Hinkley Point C accounts for around 15% of EDF’s capital spending,” said Mr. Moore. “A peak in spending is unlikely before 2022, 2023.”

The project will shift EDF’s business and financial risk profile, according to Paul Marty, a senior credit analyst at Moody’s. “The group’s balance sheet will have to shoulder the financial implications of a very long construction phase,” he said.

In return for its investment, EDF has been guaranteed a price of £92.50 for every megawatt hour of electricity it produces. This guarantee lasts for 35 years and stands at more than double the current rate for wholesale electricity prices.

“The high strike price offered by the U.K. government reflects the substantial financial, technological and contract risks EDF is undertaking to build Hinkley Point C”, said Mr. Moore.

EDF has calculated a return rate of around 9.2 % for 60 years, based on the assumption that the plant can be delivered on budget and on time which would mean completion by 2025.

Based on previous experiences in France, this appears unlikely, analysts said. EDF plans to build a so-called European Pressurized Reactor, or EPR, a technology that has yet to demonstrate its viability.

“There is currently no EPR reactor that is up and running,” said Stephen Hunt, an analyst with Barclays.

Barclays is forecasting that each six-month delay in construction will reduce the total return by 20 basis points. “We expect the completion to come four years late, with a 25% project cost overrun,” said Catherine Hubert-Dorel, an analyst with Barclays.

According to Ms. Hubert-Dorel, it remains to be seen how damaging a delay and an increase in project cost will be. “In terms of the financial pressure that will weigh on EDF, it is hard to say, as we only have high visibility for energy prices for the next few years,” said Ms. Hubert-Dorel.

Analysts expect that EDF will be downgraded during the course of the project. In June, Fitch put EDF down from A to A-, with outlook stable.

“They are investing in something that is not going to generate meaningful cash flow for at least 10 years,” Mr. Farman said.

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